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Wednesday, February 18, 2015

When a Good Strategy Is Losing Money – Part 1

“But in the market any price is always history. It’s the
price of the last transaction, holding no guarantee for even the nearest
future.”– Dirk Vandycke

What do you do when a good trading system, whose historical
results have been satisfactory, gets into a losing streak? Good strategies lose now and then, and then
gain now and then. Losing streaks are alternated by winning streaks, and what
you can do is to minimize your losses in losing periods, controlling the
drawdowns on your accounts. This is done so that your capital would be intact
when a winning period comes around. This is a reality of trading as there’s no
way around that. Yet, it doesn’t preclude you from being consistently
profitable in spite of occasional drawdowns.

People who’re rational in other fields tend to be irrational
when trading. They don’t know that trading is just any other business in life.
There’s no strategy on earth (and there’ll never be a strategy on earth) which
doesn’t experience drawdowns. No matter what trading approach you’ve adopted,
there’ll be periods when the price actions are against you.

We’re happy when we make money, without giving any thoughts
to how we control our emotions when we lose. We’re able to remain calm during
losing streaks, providing that we’re willing to do that. Let’s think about a
system that wins about 65% of the time. That means we may have about 35 losing
trades out of 100. When you buy such a system, you can lose the first 10 or 20
trades (or even more) in a row. Then you conclude that the system is trash. You
don’t know that the system would soon start winning many trades in a row.

Trading has to with probabilities and profits are analyzed over
a long period of time – not over a short period of time. When about 100 trades
are analyzed, then you’d see the merit of a good strategy. Trading should be
treated like an enterprise: losses being the cost of running the enterprise and
profits being the reward you gain from your venture.

Our society is rife with perfectionism tendency, and that’s
why there are many people who criticize everything, expecting too much of other
people while they themselves aren’t perfect. Those who do well in life are probably
correct less than half of the time, yet, mistakes are often ridiculed.
Perfectionism has no place in profitable market speculation. You got to know
that one needs to stick to a positive expectancy system even in a period of
losses, for it’ll soon be in a winning period. However, most people dump such a
system and look for another fool-proof one. The truth, however, is that another
‘fool-proof’ system that has good results in the past would also experience
drawdowns. Would you then dump such a system again? You might trash the new
system and look for another one.

For you to be called a super trader, you got to stick to a
good strategy throughout its vicissitudes. Profitable speculation in the market
needs perseverance, rules, and determination. You get rich slowly, not quickly.
Success comes at cost – it requires effort and doggedness. Keep a log of your
trades and look for ways to optimize the system.

Should you disagree with this, you may want to go from one
trading method to another, for life. Otherwise, you may want to master a good
trading method and stick to it for life. Should you prefer the latter, you may
eventually reach financial freedom. A good system makes money eventually, but
you’ll need to be faithful to it, which is something that irrational trades
don’t want to do.

You make money when a market moves. A fast-moving market
like Forex is ideal, since you make money when the move is in your favor. But
you don’t make money when then move is against you. Please take risk and money
management seriously. This is your life insurance in the markets. All traders
experience negativity, but good traders deal with negativity triumphantly. You
need to risk only 1%, or better, less per trade. You need to make sure that you
don’t go down less than 4% or 5% in total. When the position sizes are too big,
it would be difficult to control emotions.

The most important thing in trading is not to lose one’s
capital. We trade not to lose, and that’s the only way to prepare for slow and
steady growth when the time comes. Only effective risk managers can survive in
the markets indefinitely.

We learn much more from losing trades, and we learn very
little from profitable trades. Therefore, it’s what we learn from losing trades
that make us better traders. In other words, loses are the catalyst that
enables us to hone our trading skills.

This article is ended by the quote below:

“Without a plan and money management the best setups in
the world are useless.”– Dave
Landry